the Depth of the Ditch

If the Republicans “drove the country into a ditch,” President Obama shot across the road into another one. It helps to understand the landscape. Going into the 2000 presidential election, according to the Pew Research Center, 35% of voters self-identified themselves as Democrats, 31% as Republicans, and 34% as Independents. By the 2004 elections, 35% still identified themselves as Democrats, 33% as Republicans, and 32% as Independents. Just before the 2008 election, Democrats were up to 36%, Republicans down to 27%, and Independents led everybody with 37%[1]. The ditch was real. Republicans had picked up two points during Mr Bush’s first term, but lost six during his second.

Add to that, in 2000, Independents split evenly at 11% leaning toward Democrats and 11% leaning toward Republicans; in 2004 it was 12% leaning toward Democrats and 11% still leaning toward Republicans. For the 2008 elections, 15% of Independents leaned Democratic while only 10% were leaning toward Republicans. A 9% partisan gap coupled with a 5% gap among Independents. It was a precipitous drop in support.

Today the picture is strikingly different. 33.5% of likely voters identify themselves as Republicans, 33.5% as Independents, and 33.0% as Democrats[2]. During the month of August, the number of Independents grew from 32.1% to 33.5%, the highest level in seven years of tracking. While that number grew during the debt ceiling debate, the president’s party lost support, dropping from 34.8% to 33.0%, the lowest number in seven years of tracking. Overall, 45% of voters say they at least somewhat approve of the president’s job performance (22% Strongly Approve, 23% Somewhat Approve). 53% at least somewhat disapprove (42% Strongly Disapprove, 11% Somewhat Disapprove)[3]. Eleven percent fewer than self-declared Democrats don’t strongly support the job that President Obama is doing, while 10.5% over-and-above self-declared Republicans strongly disapprove of the job he’s doing. A majority of likely voters at least somewhat disapprove. The ditch is real.

The Obama bubble has popped.

His base will vote for him – they’ve got nowhere else to go. The Republican base will support whatever candidate emerges – they’ve got nowhere else to go. The problem for both sides is the level of enthusiasm. Normally, a light turnout will favor an incumbent, but not necessarily this time. Neither Democrats nor Republicans can just tread water until the election, both must find ways to enthuse their base and persuade Independents. And that’s tricky business. You can’t just rile up one base – to throw red meat to either is to energize the other as well. Independents are hard to artificially persuade – they tend to read events and evaluate results.

In just three years, Democrats have lost 2.5%, Independents have lost 3.5%, and Republicans have gained 6.5%. A statistically significant number of Democrats have become fence-sitters, and an even larger number of fence-sitters are now identifying with Republicans. That’s seismic.

President Obama finally has a record – 9% unemployment, flat GDP, a banana republic level of debt and endless projected deficits – but he can’t run on it. All he can do is somehow rally his base more than their base, and demonize his opposition. That may not work, depending on how the Republicans respond to their own funk.

For their part, the GOP is overlooking the “good” in search of the “perfect.” By all measure, Mitt Romney would beat President Obama if the election were held today, meaning that in all probability, he would in November 2012 as well – nothing Obama’s team is proposing is new or different, meaning that hiring will remain below replacement level, GDP growth will remain anemic, and, not having produced a budget yet again, nothing is going to cut deficits or debt between now and then[4].

Against this backdrop, Republicans are tilting at Reagan’s image, searching for another galvanizing conservative who can charm the press and public alike. They don’t need to. All they need is someone who comes across as sincere in his proposals, capable of running a huge bureaucracy, and has the gumption to stand up to demonization and a hostile press while being gracious about it all.

They’ve got one of those now.

[1] Statistics from: Fewer Voters Identify Themselves as Republicans, Pew Research Center for the People & the Press, March 20 2008. Pew Research polls registered voters.

[2] Partisan Trends, Rasmussen Reports, September 1 2011. Rasmussen polls likely voters.

[3] Daily Presidential Tracking Poll, Rasmussen Reports, September 27 2011.

[4] The SuperCommittee, not even reporting out until Thanksgiving, won’t have enough time to be effective before the next November, assuming the president uses their ideas, regardless of his history of ignoring “Blue Ribbon Panels” in the past.

Two Debates

There were two debates last week, one televised one not, both important on a national level.

Taking the televised one first, professional Republicans are, again, looking for a not-Romney candidate after Governor Perry’s lackluster performance Thursday night. It may be a case of style over substance, but no matter, Rick Perry is destined for second-tier status. The pundits are focused on his halting responses to a couple of questions, but mine was on his rather unfocused articulation of foreign affairs (when his response to a question about Israel wandered all over the place, never answering what should have been a rather easy question for a conservative).

No follow up was pressed, by either moderator or fellow candidates.

And then late Saturday, Herman Cain surprised everyone by winning the Florida straw poll going away. Not even close. Perry was a distant second, and Romney narrowly third, Michele Bachmann finished dead last (behind all the Hobbits and a former New Mexico governor no one has heard of, or even knew was in the race). I don’t put much stock in straw polls, but these results were unexpected, if not really important beyond the next one.

Rick Perry would be well advised to shift his aim from Romney to Obama. Begin a well-reasoned campaign emphasizing, specifically, what is wrong with the current administration’s approach to governing, and, specifically, what he would do differently. He needs a written economic plan that compares favorably to Mr Romney’s and a written foreign policy paper (which none of the candidates has yet produced). He needs to demonstrate why he is the best choice to replace President Obama in 2012, not why he might be “better” than Romney, or any of the Hobbits.

Michele Bachmann is on her way out. She needs to actually win the Iowa caucus to have any hope of being a player beyond Iowa – and restrain herself from saying anything stupid in the meantime.

Newt Gingrich is the smartest guy in the room, but isn’t willing to talk-down to voters (to imply his positions, rather than state them), but he has done extensive research on which issues resonate with voters, and which solutions are favored by majorities and pluralities of them. He also understands what will actually work, and what is possible to get through Congress. His problem is that, while he would have ample time and opportunity to communicate his ideas (and why they are better than Congress’s) directly to the people as president, he doesn’t really have that opportunity during the campaign. Too much “gotcha” by competitors and lack of insight by journalists.

Ron Paul is too extreme to be electable, Governor Huntsman too boring, and Rick Santorum too indistinguishable from the pack. I think there may be one or two others, but the fact that I can’t remember tells you all you need to know about their chances.

The other debate was the tentative agreement reached between General Motors and the United Auto Workers (contract talks between the UAW and Chrysler are ongoing, and Ford’s will start soon). First-year UAW President Bob King reached an agreement with GM’s Dan Akerson (also in his first contract negotiation) that actually allows both parties to realize some of their wishes. Part of the reason is the bailout’s no-strike mandate, removing the nuclear option from the UAW.

Basically, the union won the re-opening of GM’s Spring Hill [TN] plant and production guarantees at other plants that will mean 6,400 new jobs. Employees also get up to a $5,000 “signing bonus” for ratifying the contract agreement, and increased profit-sharing that could mean up to $25,000 for each worker over the four-year life of the contract.

In light of a signing bonus and increased profit-sharing, GM won the dropping of automatic COLAs for up to 40,000 current workers, and drop pay increases for higher-paid hourly workers, also totaling around 40,000. GM would offer skilled-trades workers, who earn the highest pay, $75,000 to leave the company. Veteran line workers, who earn roughly twice the pay of lower-wage workers, would get $10,000 to go. These offers apply to around 17,000 current senior workers at GM. Approximately 4% of the current hourly workers are paid the lower wage, which would rise to $19.28 an hour from between $14 and $16 an hour. Chris Cerasco, an analyst at Credit Suisse, estimated that every top-tier worker replaced by a lower-wage worker will save GM between $40,000 and $50,000 a year in wages and benefits.

Pre-new-contract, the Detroit Three are paying (wages and benefits) ~$49 an hour at Chrysler, $56 an hour at GM, and $58 at Ford. These figures are marginally competitive with non-union foreign plants operating in this country as long as quality holds up in the Big Three’s cars.

The significance of the GM deal is that it finally gives the union some skin in the game – it now matters whether or not GM is profitable – it’s a beginning toward putting employees and employers on the same team, and that’s organized labor’s only long-term hope of surviving globalization.

Damage Control

To get the economy back on track – once the recovery is self-sustaining – will take some sober thought, because as it is, the economy is set to self-destruct. The current norm is geared toward perpetual and ever-increasing deficit spending.

First, the capital markets have to be reinforced against a recurrence of 2008-09. Significant aspects of Glass-Steagall should be reinstated whereby investment banking is again separated from deposit banking. If a bank wants to develop a “financial products” division, it needs to get out of the mom-and-pop deposit business. Firewalls between where citizens save their money and where financial institutions trade their securities should extend to banning common boards, executive and operating officers. The separation must be real. Branch banking (outlets in multiple states) should require a reserve fund be kept at corporate against a companywide failure, and it should be in addition to the reserves held at each branch.

The derivatives market is already being addressed by Congress, requiring more transparency regarding the underlying assets, who owns them, and who appraised them. Foreclosure rules need tightening, in light of the vast number of institutions issuing foreclosure notices on properties for which the actual titles can’t be located, and the amount of fraudulent paperwork being filed in others. Issuing institutions must be held liable for the paperwork in filings, and foreclosure filings must be accompanied by complete paperwork.

Serious examination of Fannie Mae and Freddie Mac is long overdue. These quasi-governmental organizations have had free rein for too long, and their practices are questionable at best. The GAO needs to go over their books with the power to fire responsible executives, revoke pensions, and issue a public report to Congress with recommendations on how to restructure these agencies more closely to their stated mission.

The structural revamping of the economy needs to start with the repeal of ObamaCare. This has nothing to do with the political arguments and everything to do with the labyrinthine complexity, unintelligible metastases through the federal code, and the inevitable cost burden to future generations. This massive piece of legislation is so poorly written, so costly, and so shot-through with unadvertised consequences that it should just be erased.

As I’ve stated in these pages before, Social Security, as currently structured, is a Ponzi scheme. It survives by paying beneficiaries by taking money from newer subscribers. And even that is becoming inadequate as OMB has reported that as Baby Boomers’ retirements continue to increase, monies from the general treasury will be required to fulfill obligations. Charles Ponzi would generally leave town before this stage of the scheme.

The trust fund is a scam. Congress has long ago spent the actual money, replacing it with special-issue treasury bonds. Think about it – when those bonds are “cashed in” to make payments, guess who buys them. That’s right … taxpayers. We have to buy the IOUs in order to get our benefits[1]. If a citizen (rather than politicians) did this, he would end up at Leavenworth for interstate fraud.

An immediate fix is available by turning the revenue/payout methodology rightside up: tax every dollar of income (not just up to some level) and means-test eligibility for benefits. This would, temporarily, allow the Ponzi scheme to continue working until a restructuring can take place. The alternative would be to cut-off benefits when one’s contributions, plus interest, have been paid back, but I prefer the first method.

In the long run, Social Security needs to follow the private sector’s lead and look more like a 401(k). Businesses are turning more to this vehicle because they can’t afford to support two payrolls: the one that works for them, and the one that used to. It’s the same for government. We need to get to the point where the beneficiary is paid by the economy rather than the taxpayer. I would also eliminate pensions and health insurance for elected members of government – let them bring the plans they had before the election with them to Washington.

GAO should look at program duplication throughout government. Some projects have as many as ten or more different agencies doing basically the same thing, each with ever-increasing budgets (government budgets always increase year-over-year). These programs need to be consolidated or, in some cases, eliminated altogether. This is nothing more than turf-protection between and among agencies, and is wasteful.

Regulations that cost an industry $100 million or more should be vetted by CBO, and the results made public with time for comment, before they can be enacted. Government should not be free from cost/benefit analysis.

The non-defense agencies of government should go through a re-allocation of budget, like Secretary Gates did with DoD, before any strictly numerical cuts affect defense. We are getting dangerously close to underfunding the defense establishment (as we do at the close of every armed conflict, only to rue the day when next one comes along). Defense spending should be targeted at a percentage of GDP, rather than what’s left over during peacetime.

On tax policy, we need get back to the idea that the function of taxes is to pay for government, not to conduct social engineering. The fairest – by the non-political definition – is a flat tax without any deductions, allowing for a no-tax floor for those at or below a legitimate poverty level (not some multiple of a poverty level). Both personal and corporate. Once done, this will assure that all eligible earners will pay something for government, eliminating the moral hazard of having great swaths of voters with no skin in the game, and raising the amount of revenues collected by government at significantly lower rates for most taxpayers. The rate should be somewhere around 18% for everyone (with a 2/3 supermajority required for diddling with the rates).

The overall target for government spending should be somewhere around 20% of GDP. That will put us back at the proportion of government that allowed America to become the freest, most prosperous nation in history.

[1] These special issue bonds are “sold” to the general treasury – where the actual money went when the bonds were issued as IOUs.

Now the Hard Part

The history of bubbles is that they inflate until “conventional wisdom” catches up with reality and people realize that the inflated commodity is dangerously overvalued, and the bubble pops. This results in an overreaction, depressing the value of the commodity until it is undervalued, and people get back in, causing a dramatic upturn. Housing, in other words, won’t recover until prices are allowed to find their bottom. As long as housing prices are being propped up (ostensibly to stop evermore mortgages from going upside down), the housing recovery will be delayed. The market isn’t purging high prices because they are high, it’s purging high prices because they’re artificial.

The foreclosure problem isn’t about housing prices per se, as much as it is about who bought the houses in the first place. If you allow an arbitrary number of unqualified people buy houses, you are going to generate a commensurate number of foreclosures. That’s not even complicated theory, just common sense. The problem, of course, is that in the interim, a widening of the demand-pool raised prices on all housing (as increased demand always does), so that when the bubble popped, it immediately lowered those artificially high prices on all housing. The drama – the amount of the fall – is a function of time: how long the artificial conditions were allowed to stand. In this case, thirty years. There’s not really a good way out of this situation – that’s why they call it a moral hazard to “help” people get something they can’t afford.

Government did this, so government should do what it can to ease the market correction. The problem, of course, is that “government” is all of us, and making taxpayers – that is, those who have paid their bills and mortgages – pay for foreclosees’ problems isn’t really fair. But some form of mortgage-support program would be justified by the circumstances. It should be temporary and diminishing. Most of the people in trouble aren’t going to be able to keep the houses that are in or near foreclosure, but the transition can be softened.

Future foreclosures should be mandated to be filed with complete paperwork for which the issuing bank or organization will be held legally responsible. Then let prices go where they will. This is the quickest way to get back to a sane housing market.

Revving up the construction industry is going to be tough because of the housing slump. Commercial construction depends on business investment, and that can be fixed. Businesses are reluctant to invest because they don’t know if they will punished next year for whatever they invest in this year (including people). It’s that uncertainty thing. The administration could solve this be clearly stating its agenda for the next two years. Temporary fixes won’t convince business to do what they wouldn’t do otherwise. Rebates, one-year tax credits, one-year waivers from regulations, and so forth, won’t get business to invest. If you want to diddle with the tax code, change the rates. Permanently. If you want to waive businesses from regulation, exempt them from the regulation. Permanently. If you want to spur small business, get out of their way. Permanently. These are the things that will entice business to spend millions or billions on new ventures or expansion.

Beyond that, the administration could ease two problems – arbitrary unemployment in the Gulf region and increased isolation from OPEC – by opening up all regions of the Gulf for drilling that were open before the BP spill. That accident is now well understood, and improved requirements and inspection can prevent a recurrence. Open up Anwar (north Alaska) to exploration. Look at the regulatory obstacles to natural gas fracking and shale operations. At $70 oil, both of these technologies become economically competitive if unrealistic regulations are removed.

And don’t do any of these by phasing them in over five, ten or more years. Do it the day after it is announced.

To get pressure off of the banks’ willingness to loan again, immediately repeal the Community Reinvestment Act of 1977, allowing banks to return to financial, rather than political, criteria for loan qualification. They’re sitting on money because they have no idea when government is going to go back to home-ownership-as-a-right. And for God’s sake, quit extending unemployment benefits – we can’t afford it, and it suppresses incentive to really look for work, or to take what work is available (rather than hold out for a “better” one). If you’ve been out of work for a year or more, you’re back to entry-level. Sad, but a fact of life in the real world.

Consumer spending is a bit of a conundrum. People are saving more – which is a good thing – but it’s costing retailers – which is a bad thing. We’re going to have to get used to less consumer spending, as a rule, than in the past because consumers were as over-extended on credit as business and government. That’s the mindset everyone was in. And now that they’ve been burned, they’ll not easily go back to their old ways. That’s going to slow economic growth to a new norm by perhaps 0.5% to 1% of GDP per year. Fee-happy credit card companies will suppress the tendency to bring back full-blown deficit-living on the part of most people, but good times will bring back a more complacent attitude. We may never get back to where we were with consumer spending, but we’ll get closer as the economy heals.

The loss of government jobs should be allowed to stand. We don’t need big, bloated government, at very least during an attempted recovery where government spending crowds out private spending, which we should be trying to encourage.

This is all aimed at de-fib for the job market. Making the systemic changes to the government-business interface to realign the economic metabolism more closely to sustainability will take other, longer-term measures, which I will discuss under separate cover.